ACCA PM Chapter 1 - Activity Based Costing

Overheads = Expenses

In ACCA F2, we probably used only one cost driver (e.g., labor hours) to calculate costs.

Activity-Based Costing (ABC) attempts to absorb overheads in a more accurate (and therefore more useful) way.

The steps to be followed are as follows:

1. identify the major activities that give rise to overheads (e.g., machining; dispatching of orders)
2. determine what causes the cost of each activity – the cost driver (e.g., machine hours; the number of dispatch orders)
3. calculate the total cost for each activity – the cost pool (e.g., total machining costs; total costs of despatch department)
4. calculate an absorption rate for each cost driver
5. calculate the total overhead cost for each product manufactured
6. calculate the overhead cost per unit for each product

Source:https://opentuition.com/acca/pm/acca-performance-management-pm-lectures/